A Veterans Affairs Loan (VA Loan) is a home mortgage loan backed by the U.S. Department of Veterans Affairs. It is available to: (i) an active-duty service member or an honorably discharged veteran who has 90 consecutive days of active service during wartime or 181 days of active service during peacetime[1]; (ii) an individual that has served more than six years in the National Guard or the Selected Reserve; or (iii) the spouse of a service member who died in the line of duty or as a result of a service-related disability.

Notably, VA Loans are assumable by any buyer of residential property, meaning the loan can be transferred from the current borrower to any new buyer at which point the buyer makes payments to the lender. The interest rate and terms of the loan remain the same.

For the buyer, assuming a VA Loan can offer many benefits, including allowing them to avoid the costs associated with closing a new mortgage loan, such as origination fees, appraisal fees, and other closing costs. Additionally, the buyer may be able to take advantage of the existing loan’s favorable terms, including a lower interest rate than what the buyer may currently be able to obtain.

However, allowing a buyer to assume a VA Loan may not always be beneficial to the veteran seller.

The first thing that the veteran seller needs to know is that even after the new owner assumes the VA Loan, the veteran seller will not automatically be freed of liability under the loan. To be released from liability under the loan, the veteran seller must obtain from the lender a release of liability. To do this, the veteran seller should complete and submit to the VA an “Application for Assumption Approval and/or Release From Personal Liability to the Government on a Home Loan.” Without a release of liability, the veteran seller may remain liable for the loan.

The second thing the veteran seller needs to consider is that if the buyer assuming the loan is a nonmilitary borrower, the VA will not restore the veteran’s full VA Loan entitlement until the loan is paid in full.

However, if the buyer assuming the loan is also an eligible military borrower, the veteran’s full VA Loan entitlement may be restored so that they can purchase another home utilizing this benefit. This is done through substitution of entitlement, which essentially allows the veteran seller to swap their entitlement with the veteran buyer. But without substituting entitlement, the veteran seller’s VA Loan entitlement will remain attached to the mortgage until it is paid in full.

Whenever two veterans intend to pursue substitution of entitlement, the veteran buyer should complete VA Form 26-8106, Statement of Veteran Assuming GI Loan, for transmittal to the VA following completion of the ownership transfer approval process. It is also recommended that both veterans complete and submit VA Form 26-1880, Request for a Certificate of Eligibility.

IMPORTANT NOTE:  While VA Loans are in fact assumable, veteran sellers should carefully decide whether doing so is in their best interest. Otherwise, they are at risk of remaining liable for the balance of the loan and losing their full VA entitlement, an important benefit that may enable them to purchase a future home.

This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.

See also: NAR Consumer Guide: What is the VA Home Loan Guaranty?

[1] If service began after September 7, 1980 (enlisted) or after October 16, 1981 (as an officer), to be eligible the veteran generally needs to have completed 24 continuous months of active duty, unless discharged earlier for a qualifying reason (e.g., hardship, service-connected disability, or reduction in force).